Taxpayers Guide to LLCs and S Corps
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Statutory Employee and NonEmployees
There are certain workers who are considered employees by statute, and the discussion is moot. Workers who fall into any of the following four categories are considered employees, and if they meet all three Social Security and Medicare criteria (below) then those taxes must be withheld:
- A driver who is your agent or is paid on commission, and distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning.
- A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
- If you furnish specifications for the work to be done to an individual who works at home on materials or goods that you supply, and that must be returned to you or to a person you name.
- A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity. See Salespeople in the next set of articles.
If you fall into one of the four categories above, then Social Security and Medicare taxes must be withheld if:
- The service contract states or implies that the services are to be performed personally by him or her, and
- The worker does not have a substantial investment in the equipment and property used to perform the services, and
- The services are performed on a continuing basis.
There are three categories of statutory nonemployees: direct sellers, licensed real estate agents and certain companion sitters.
Direct Sellers, Licensed Real Estate Agents: These workers are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:
- Most payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than the number of hours worked, and
- Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.
Companion Sitters: Those who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes.